Dollarama (TSX:DOL) Is a Top Buy Going Into a Recession

Dollarama Inc. (TSX:DOL) is a top Canadian stock for investors who want to reduce risk and prep for what could be a nasty recession or depression.

| More on:

Dollarama (TSX:DOL) is precisely the type of business you’d want to invest in if you’re at all worried about a severe recession (or depression) that the insidious coronavirus (COVID-19) is going to leave behind.

The unemployment claims amid this crisis have been unprecedented, and they could rival the rate of unemployment during the Great Depression. While governments and central banks around the world have been throwing everything but the kitchen sink to counteract the pain that lies ahead, investors would be wise not to prepare their portfolios for could be years of economic distress.

Dollarama: A defensive growth stock that could outperform in a severe recession

Dollarama stock has been a roller-coaster ride over the past few years thanks to company-specific issues (such as meagre comps) and fading growth prospects that have yet to be addressed.

The former market darling previously suffered a major correction, one that I called back in 2018. At this market crossroads, the stock is modestly valued and is in a position to hold its own quite well, as the economy falls into a recession. Given the defensive nature of dollar stores, Dollarama may be one of few TSX stocks that could stand to rally should the broader markets crumble like a paper bag on bad earnings and horrendous economic data, which are coming down the pipeline.

Given the unprecedented unemployment, which has the potential to get much worse over the coming months, consumers are going to need every dollar to go as far as it can. And for Dollarama, which offers arguably one of the best value propositions for low-cost goods, the coming economic downturn could act as a significant boon for comps.

A mixed quarter that was nothing to write home about

More recently, Dollarama reported somewhat decent fourth-quarter fiscal 2020 results that saw decent same-store sales growth (SSSG) comps (which isn’t saying much as the SSSG numbers were being compared to a brutal quarter).

Although management didn’t give forward-looking guidance, the company is poised to take more of a hit for the duration of the coronavirus-induced lockdown, as many of its stores face reduced hours and traffic. Once the economy re-opens and it’s safe to go outside again, I believe Dollarama could face a massive sales boost, as belt-tightening Canadians look to get the most bang from their buck.

Moreover, Dollarama also has more than enough liquidity to ride out a potentially prolonged pandemic-induced lockdown. The dividend is safe and could be in a position to buck the “dividend-reduction trend” and grow in a post-pandemic recession (or depression) environment.

What about valuation?

At the time of writing, Dollarama stock trades at 3.6 times sales and 19.4 times next year’s expected earnings, both of which are considerably lower than the stock’s five-year historical average multiples of 4.4 and 22.4, respectively.

As a defensive growth stock that can outperform in times of economic hardship, Dollarama looks like a bargain for Canadian investors looking to take more of a “risk-off” approach as we go deeper into uncharted territory.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

More on Coronavirus

A airplane sits on a runway.
Coronavirus

3 Fresh Stocks I’m Likely Buying in 2025

I am likely buying Air Canada (TSX:AC) stock in 2025.

Read more »

RRSP Canadian Registered Retirement Savings Plan concept
Coronavirus

Canadian RRSP Stocks to Buy Now for Retirement

Alimentation Couche-Tard Inc (TSX:ATD) is a quality retirement stock.

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Coronavirus

Retirees: What Rising Inflation Means for Your CPP Payments

If you aren't getting enough CPP, you can consider investing in stocks and ETFs. Canadian National Railway (TSX:CNR) is one…

Read more »

Coronavirus

Air Canada Stock Is Starting to Get Ridiculously Oversold

Air Canada (TSX:AC) has been beaten down to absurd lows.

Read more »

Coronavirus

Should You Buy Air Canada Stock While it’s Below $18?

Air Canada (TSX:AC) stock is below $18. Should you invest?

Read more »

Illustration of data, cloud computing and microchips
Stocks for Beginners

3 Canadian Stocks That Could Still Double in 2024

These three Canadians stocks have been huge winners already in 2024, but still have room to double again in the…

Read more »

Aircraft Mechanic checking jet engine of the airplane
Coronavirus

Can Air Canada Stock Recover in 2024?

Air Canada (TSX:AC) stock remains close to its COVID-19 era lows, even though its business has recovered.

Read more »

A airplane sits on a runway.
Coronavirus

3 Things to Know About Air Canada Stock Before You Buy

Air Canada stock continues to hover below $20 despite the sharp rise in travel demand seen across the industry. What's…

Read more »